In a move designed to address surging inflationary pressures, US policymakers implemented their largest single increase in interest rates since 1994, raising the key federal funds rate by 0.75 percentage points.
- The federal funds rate has reached a target range of 1.5% to 1.75%
- US inflation reached 8.6% YoY in May
- Rates are forecast to reach 3.4% by the end of 2022
In a move designed to address surging inflationary pressures, US policymakers implemented their largest single increase in interest rates since 1994 , raising the key federal funds rate by 0.75 percentage points. The decision followed increases of 25 basis points in March and 50 basis points in April. The members of the Federal Open Market Committee (FOMC) voted by eight to one in favour of the 75 basis point increase; one member voted for a smaller increase of 50 basis points. The federal funds rate has now reached a range of 1.5% to 1.75%.
“Inflation has obviously surprised to the upside … further surprises could be in store” (Fed Chair Powell)
The Fed downgraded its expectations for economic growth in the US this year from 2.8% to 1.7%. Fed Chair Jerome Powell said: “Inflation has obviously surprised to the upside … further surprises could be in store. We therefore will need to be nimble”. The rate of consumer price inflation in the US hit 8.6% year on year in May, stoked by continuing increases in the price of energy, food, and new and used vehicles.
Chair Powell commented: “Today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common”. Nevertheless, an increase of either 50 or 75 basis points appears to be likely at the FOMC’s next meeting at the end of July. Fed officials believe rates could rise to 3.4% by the end of 2022 and 3.8% by the end of 2023.